The Black Swan

Hey there, time traveller!This article was published 10/5/2011 (2040 days ago), so information in it may no longer be current.

The Public Utilities Board is slowly winding down its mega-hearing into Manitoba Hydro, and whether the Crown corporation has done a proper job of studying what could wrong in the next 10 years as it plans to spend $20 billion to build two new dams to sell more surplus power to Minnesota and Wisconsin.

Last week the PUB heard from two McMaster University economics professors who were hired to review if Hydro is doing a good enough job of managing its risk. The transcripts are posted on the PUB’s website.

One item that came up was The Black Swan.

Not the Natalie Portman movie and not the Thom Yorke (Radiohead) song.

The Black Swan in the PUB hearing refers to the 2007 book by philosopher-mathematician Nassim Nicholas Taleb.

Simply, Taleb says we can plan for all sorts of things, but we can’t forget that something can always sneak up unexpectedly and bite us in the ass.

In the PUB hearing last week, McMaster prof Dr. Atif Kubursi put it this way: "The whole issue here that Taleb was basically putting forward is that the realm of probability does not exclude the realm of possibility. That just because something is not known to happen with a positive significant probability or just positive probability doesn't mean that we can dismiss it."

So what does The Black Swan have to do with Hydro?

Kubursi and fellow McMaster economics prof Lonnie Magee spent several months examining how Hydro plans for risk; does it spend enough time and resources looking at what could bite it in the ass?

They also reviewed a raft of material done by other independent experts into how Hydro manages its risk.

And to cover all bases, Kubursi and lawyer Gavin Wood also met with the "New York Consultant," or the whistleblower, in New York to get her take on the inner workings of Hydro. Magee couldn’t get a passport quick enough.

Several months ago, she caused quite a tizzy when she claimed Hydro has done such a bad job of managing its risk that Manitoba was headed into a decade of blackouts and deep, deep debt.

Kubursi and Wood’s meeting with her started out OK, but later ended badly.

"I carried George with me through the streets of New York. If you don’t know George, George is her bird," Kubursi told the PUB.

While the whistleblower and Kubursi met, Wood babysat her child.

Again, the meeting started off on the right foot, but went soon went downhill when the whistleblower got suspicious of their intentions. She refused further meetings.

"We could gather very quickly that she was so obsessed with intellectual property, that even if she whispered to you, ‘Good morning,' that maybe she had signed a royalty agreement on it," Kubursi said.

"She came to our hotel and we met — she was quite open in — in her special way. I mean, open in the sense that she was quite generous in making pronouncements and generalizations. Nowhere was she willing to explain at lengths the methodology and the way she reaches these conclusions or allegations."

He also said a lot of the whistleblower’s so-called intellectual property appears to be already widely available in the public domain.

"They’re in any statistical textbook or referenced in any standard elaboration on risk management," he said.

What the PUB wanted to know from Kubursi and Magee is whether Hydro has done its homework, so if it does get the green light to spend $20 million over the next decade on two new dams and Bipole III that Manitobans aren’t left holding the bag if a Black Swan scoots up and bites it in the keister.

First, Kubursi and Magee told said Hydro has no choice but to export power.

They recommended Hydro do a lot better job than it is now of examining its future risk, such as what happens to export sales if there’s a drought; if the demand for hydroelectric power is less than expected; if the U.S. economy is slower at recovering, if natural gas prices stay low.

And again, consider The Black Swan.

But Kubursi, in his PUB testimony, also said this: "One of the best economists is now, you know, most often is recognized, and his name is used in — in vain. John Maynard Keynes says, in the final analysis, what prevails is the animal spirit. When it comes to investment, you could go with the most secure and most precise calculations, and the final analysis is what the animal spirit do. Those in the market who take the risk will get the gain, and those who run away from it will be punished."

What PUB has to do in the coming months is satisfy itself whether Hydro is ready enough for the kill.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments.
All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.